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Rohansharma

Top 5 investor

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Introduction

All participants in the stock market share the same objectives and hopes. Like the world’s richest investors, such as Warren Buffet, Rakesh Jhunjhunwala, and Jeff Bezos, almost everyone aspires to financial success. Everyone wants multibaggers with stock returns of 5x, 10x, or 20x over the long run.

 

Finding these stocks or other products is crucial in the stock market, just like in any other area of your life where you invest your time, patience, money, etc. However, not everyone is capable of doing this. As a result, we have created a list of successful Indian stock market investors together with their share market quotes. Why don’t we start now?

Top 5 Indian Share Market Investors

Keep an eye on long term is important for successful person

RadhaKishan Damani

learning sharks

The business community regards Mr. Radhakishan Damani as an astute stock market investor in India who has founded a company that is constantly working to better understand customer needs and offer them the right answers.

Mr. Damani, a fervent supporter of the fundamentals of business and high moral standards, built DMart into a successful, large-scale retail chain that is well-liked by consumers, partners, and employees.

 

Mr. Radhakishan Damani, one of India’s most successful and well-known value investors, was already well-known. Because of the way he made investments, he had a thorough understanding of the psychology of the Indian consumer market.

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“Never invest at unreasonable valuations. Never run for companies which are in limelight."

rakesh jhunjhunwala

Rakesh Jhunjhunwala, also referred to as “The Big Bull” and “India’s Warren Buffet,” is one of the most well-known and valuable stock market analysts in India.

Rakesh, who was raised by a salaried officer, started working as a contract bookkeeper before making his way into the stock market. He currently deals in stocks. He started with a modest investment of Rs 5,000 and has now accumulated assets worth about Rs 15,000 crore.

Mr. Jhunjhunwala obtains his riches from “Rare Enterprises.” It was given that name because it was a combination of his significant other’s name and his own initials.

 

Re-kha and Ra-kesh, specifically. He currently has an executive position at Aptech Limited. He also works for Hungama Digital Media Entertainment Pvt Ltd, another employer.

Very, very few businesses have permanent moats.

ramesh damani

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Image credit -Moneycontrol

One of India’s best stock market financial experts, investor expert Ramesh Damani, began his wealth-building career in the 1990s when the Sensex was at 600. Damani earned a bachelor’s degree from HR College in Mumbai and a master’s degree in business administration from California State University, Northridge (BBA)


His current business partner is Ramesh Damani Finance Pvt Ltd. Ramesh Damani, the successful stock market analyst and investor’s son, joined the Bombay Stock Exchange in 1989. (BSE).

 

Ramesh intended to work as a stock broker. However, after he realised he was enjoying picking profitable companies, he turned into a long-term speculator.

learning sharks

“There are new opportunities, new businesses, new managements, new ways of looking at things, and you have to keep reading. I don't think there is any alternative to that to keep making money in the stock market.”

Ramdeo Agrawal

Raamdeo Agrawal, a specialist in Indian securities and exchanges finance, is well-known in the field. He has a lot of confidence in the Motilal Oswal Group as well. He invested money in Hero Honda in 1995, when the well-known Indian company had a market worth of only INR 1,000 crores.

 

Raamdeo Agrawal held onto his investment in the bike manufacturer’s shares for 20 years at a price of 30 rupees per share before they skyrocketed to 2,600 rupees per share. Today, the market capitalization of HERO has risen to over 73,000 crores.

“Only two people can buy at the bottom and sell at the top- One is God and the other is a liar.”

Ramdeo Agrawal

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Mr. Vijay Kedia is a financial guru from India who makes straightforward yet successful investments. Being a member of a family of stockbrokers, he has always been fascinated by the financial world.

 

He began trading stocks on the stock exchange for the first time at the age of just 19. In the beginning of his trading career, he was very successful, but he later suffered significant losses.

 

Then he struck out on his own, but this time he failed miserably. Just around 10 years into trading, he recognised he had nothing to show for his efforts and switched his focus to investing. Mr. Kedia realised he could contribute on his own because it was possible to learn about investing.

Ashok Leyland shares 

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Ashok Leyland's stock rises as the automaker receives a large order from the UAE.

Ashok Leyland shares rose more than 4% in early trade on September 1 after the company announced a massive order for 1400 school buses in the United Arab Emirates (UAE). This is the largest supply of school buses the company has ever had in the Gulf region.

 

The stock was trading at Rs 160.20 per share on the BSE at 11:16am, up 4.03 percent, while the benchmark Sensex was at 59,129.10, down 407.97 points or 0.69 percent.

 

The total fleet deal for Gulf Cooperation Council (GCC) buses is worth AED 276 million ($75.15 million). Swaidan Trading – Al Naboodah Group, one of Ashok Leyland’s UAE distribution partners, received the order.

 

Most of the supplies will be made to Emirates Transport and STS Group, a statement from the company said.

According to the Hinduja Group flagship, the 55-seater Falcon bus and 32-seater Oyster bus will be supplied from its manufacturing facility in Ras Al Khaimah, UAE, which is the only certified local bus manufacturing facility in the entire GCC region.

 

The Ras Al Khaimah plant is a joint venture between Ashok Leyland and the Ras Al Khaimah Investment Authority (RAKIA) in the United Arab Emirates, with a capacity of 4,000 buses per year.

 

Analysts are mostly optimistic about the stock. They believe there is a 30% chance of success.

 

According to BP Wealth, the most recent broker to initiate coverage on the stock, with the expected pick-up in the segment and Ashok Leyland being a market leader with a strong product portfolio and further launches planned in CNG/LNG buses, bus volumes are expected to rise rapidly.

 

On the scrip, the brokerage has set a target price of Rs 205.

8.1 – Intrinsic Value

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Learning sharks- stock market institute

8.1 – Intrinsic Value

The moneyness of an option contract is a classification method wherein each option (strike) gets classified as either – In the money (ITM), At the money (ATM), or Out of the money (OTM) option. This classification helps the trader to decide which strike to trade, given a particular circumstance in the market. However, before we get into the details, I guess it makes sense to look through the concept of intrinsic value again. The intrinsic value of an option is the money the option buyer makes from an options contract provided he has the right to exercise that option on the given day. Intrinsic Value is always a positive value and can never go below 0. Consider this example – Given this, imagine purchasing the 8050CE and having the option to exercise it today rather than waiting for it to expire in 15 days. What I want to know is how much money you would stand to make if you exercised the contract right now. Do you recall that when you exercise a long option, the profit is equal to the option's intrinsic value less the premium paid. Therefore, in order to determine an option's intrinsic value and respond to the question above, we must consult Chapter 3's call option intrinsic value formula. Here is the formula – Intrinsic Value of a Call option = Spot Price – Strike Price Let us plug in the values = 8070 – 8050 = 20


So, if you were to use this option right now, you would be able to earn 20 points (ignoring the premium paid).

Here is a table that determines the intrinsic value for different options strike (these are just arbitrary values I chose to illustrate the point).

I hope this has clarified how the intrinsic value calculation for a specific option strike is done. Here are a few key points I want to highlight:

The amount of money you would earn if you were to exercise the option is its intrinsic value.

An options contract’s intrinsic value is always positive. It could be a positive or negative number.

Call choice Spot price minus strike price is the intrinsic value.

Put choice Strike price minus spot price is intrinsic value.
Before we conclude this conversation, I have the following query for you: Why can’t the intrinsic value be negative, in your opinion?

Let’s use an illustration from the above table to respond to this the spot is 918, the option is 920.

  1. If you were to exercise this option, what do you get?
    1. Clearly, we get the intrinsic value.
  2. How much is the intrinsic value?
    1. Intrinsic Value = 918 – 920 = -2
  3. The formula suggests we get ‘– Rs.2’. What does this mean?
    1. This means Rs.2 is going from our pocket.
  4. Let us believe this is true for a moment; what will be the total loss?
    1. 15 + 2 = Rs.17/-
  5. But we know the maximum loss for a call option buyer is limited to the extent of the premium one pays; in this case, it will be Rs.15/-
    1. However, if we include a negative intrinsic value, this property of option payoff is not obeyed (Rs.17/- loss as opposed to Rs.15/-). However, to maintain the non-linear property of option payoff, the Intrinsic value can never be negative
  6. You can apply the same logic to the put option intrinsic value calculation

Hopefully, this should give you some insights into why the intrinsic value of an option can never go negative.

Image source - zerodha

8.2 – Moneyness of a Call option

With our previous discussions on the intrinsic value of an option, the concept of moneyness should be fairly simple to grasp. The moneyness of an option is a classification method that ranks each option strike according to how much money a trader will make if he exercises his option contract today. There are three broad categories –

 

 

  1. In the Money (ITM)
  2. At the Money (ATM)
  3. Out of the Money (OTM)

And for all practical purposes, I guess it is best to further classify these as –

  1. Deep In the money
  2. In the Money (ITM)
  3. At the Money (ATM)
  4. Out of the Money (OTM)
  5. Deep Out of the Money

 

The concept of moneyness should be fairly simple to grasp given our previous discussions on the intrinsic value of an option. An option’s moneyness is a classification method that ranks each option strike based on how much money a trader will make if he exercises his option contract today. There are three major categories:

 

Let us use an example to better understand this. As of today (7th May 2015), the Nifty is trading at 8060. With this in mind, I’ve taken a snapshot of all the available strike prices (the same is highlighted within a blue box). The goal is to categorise each of these strikes as ITM, ATM, or OTM. We’ll talk about the ‘Deep ITM’ and ‘Deep OTM’ later.

 

 

The available strike prices trade start at 7100 and go all the way up to 8700, as shown in the image above.

We’ll start with ‘At the Money Option (ATM)’ because it’s the simplest to deal with.

 

According to the ATM option definition that we posted earlier, an ATM option is the option strike that is closest to the spot price. Given that the spot is at 8060, the closest strike is most likely at 8050. If there was an 8060 strike, 8060 would undoubtedly be the ATM option. However, in the absence of 8060 strikes, the nearest strike becomes ATM. As a result, we classify 8050 as an ATM option.

 

After we’ve determined the ATM option (8050), we’ll look for ITM and OTM options.

 

  1. 7100
  2. 7500
  3. 8050
  4. 8100
  5. 8300

Do remember the spot price is 8060, keeping this in perspective the intrinsic value for the strikes above would be –

@ 7100

Intrinsic Value = 8060 – 7100

= 960

Non zero value, hence the strike should be In the Money (ITM) option

@7500

Intrinsic Value = 8060 – 7500

= 560

Non zero value, hence the strike should be In the Money (ITM) option

@8050

We know this is the ATM option as 8050 strike is closest to the spot price of 8060. So we will not bother to calculate its intrinsic value.

@ 8100

Intrinsic Value = 8060 – 8100

= – 40

Negative intrinsic value, therefore the intrinsic value is 0. Since the intrinsic value is 0, the strike is Out of the Money (OTM).

@ 8300

Intrinsic Value = 8060 – 8300

= – 240

 

 

Because there is a negative intrinsic value, the intrinsic value is 0. Because the intrinsic value is zero, the strike is ineligible (OTM).


You may have picked up on the generalisations (for call options) that exist here, but allow me to reiterate.

 

OTM are all option strikes that are higher than the ATM strike.

 

All option strikes that are less than the ATM strike are regarded as ITM.
In fact, I recommend that you take another look at the snapshot we just posted -7100.

 

NSE displays ITM options on a pale yellow background, while all OTM options have a standard white background. Let’s take a look at two ITM options: 7500 and 8000. The intrinsic values are 560 and 60, respectively (considering the spot is at 8060). The greater the intrinsic value, the more profitable the option. As a result, 7500 strikes are considered “Deep in the Money,” while 8000 strikes are considered “In the Money.”

 

I would advise you to keep track of the premiums for all of these strike prices (highlighted in the green box). Is there a pattern here? As you move from the ‘Deep ITM’ option to the ‘Deep OTM option,’ the premium decreases. In other words, ITM options are always more expensive than OTM options.

 

 

8.3 – Moneyness of a Put option

Let us repeat the exercise to see how strikes are classified as ITM and OTM for Put options. Here’s a look at the various strikes available for a Put option. A blue box surrounds the strike prices on the left. Please keep in mind that at the time of the snapshot (8th May 2015), the Nifty was trading at 8202.

 

As you can see, there are a wide range of strike prices available, ranging from 7100 to 8700. We will first classify the ATM option before identifying the ITM and OTM options. Because the spot is at 8202, the ATM option should be the closest to the spot. As seen in the above snapshot, there is a strike at 8200, which is currently trading at Rs.131.35/-. This is obviously the ATM option.

 

 

We’ll now select a few strikes above and below the ATM to determine ITM and OTM options. Let us consider the following strikes and assess their intrinsic value (also known as moneyness) –

 

 

7500
8000
8200
8300
8500
@ 7500

We know the intrinsic value of the put option can be calculated as = Strike – Spot.

Intrinsic Value = 7500 – 8200

= – 700

Negative intrinsic value, therefore the option is OTM

@ 8000

Intrinsic Value = 8000 – 8200

= – 200

Negative intrinsic value, therefore the option is OTM

@8200

8200 is already classified as an ATM option. Hence we will skip this and move ahead.

@ 8300

Intrinsic Value = 8300 – 8200

= +100

Positive intrinsic value, therefore the option is ITM

@ 8500

Intrinsic Value = 8500 – 8200

= +300

 

 

Because there is a positive intrinsic value, the option is ITM.

As a result, an easy generalisation for Put options is –

All strikes that are higher than the ATM options are considered ITM.
All strikes with a strike price less than ATM are considered OTM.

And, as the snapshot shows, the premiums for ITM options are significantly higher than the premiums for OTM options.

 

 

I hope you now understand how option strikes are classified based on their moneyness. However, you may be wondering why you need to categorise options based on their monetary value. Again, the answer is found in ‘Option Greeks.’ Option Greeks, as you may have guessed, are market forces that act on options strikes and thus affect the premium associated with them.

 

8.4 – The Option Chain

  1. The underlying spot value is at Rs.68.7/- (highlighted in blue)
  2. The Call options are on to the left side of the option chain
  3. The Put options are on to the right side of the option chain
  4. The strikes are stacked on an increasing order in the centre of the option chain
  5. Considering the spot at Rs.68.7, the closest strike is 67.5. Hence that would be an ATM option (highlighted in yellow)
  6. For Call options – all option strikes lower than ATM options are ITM option. Hence they have a pale yellow background
  7. For Call options – all option strikes higher than ATM options are OTM options. Hence they have a white background
  8. For Put Options – all option strikes higher than ATM are ITM options. Hence they have a pale yellow background
  9. For Put Options – all option strikes lower than ATM are OTM options. Hence they have a white background
  10. The pale yellow and white background from NSE is just a segregation method to bifurcate the ITM and OTM options. The colour scheme is not a standard convention.

Here is the link to check the option chain for Nifty Options.

 

 

 

 

8.4 – The way forward

After learning the fundamentals of call and put options from both the buyer and seller perspectives, as well as the concepts of ITM, OTM, and ATM, I believe we are all ready to delve deeper into options.

 

 

The following chapters will be devoted to comprehending Option Greeks and the impact they have on option premiums. We will devise a method to select the best possible strike to trade for a given market circumstance based on the impact of Option Greeks on premiums. We will also learn how options are priced by running the ‘Black & Scholes Option Pricing Formula’ briefly. The ‘Black & Scholes Option Pricing Formula’ will help us understand why the Nifty 8200 is so volatile.

Greek Calculator

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Options

• Basics of call options
• Basics of options jargon
• How to buy a call option
• How to buy/sell call option
• Buying put option
• Selling put option
• Call & put options
• Greeks & calculator

• Option contract
• The option greeks
• Delta
• Gamma
• Theta
• All volatility
• Vega

21.1 – Background

We have already covered all the significant Option Greeks and their applications in this module. It’s time to comprehend how to use the Black & Scholes (BS) Options pricing calculator to calculate these Greeks. The Black and Scholes options pricing model, from which the name Black & Scholes derives, was first published by Fisher Black and Myron Scholes in 1973. Robert C. Merton, however, developed the model and added a complete mathematical understanding to the pricing formula.

 

Because of how highly regarded this pricing model is in the financial world, Robert C. Merton and Myron Scholes shared the 1997 Nobel Prize in Economic Sciences. Mathematical concepts like partial differential equations, the normal distribution, stochastic processes, etc. are used in the B&S options pricing model. This module’s goal is not to walk you through the math in the B&S model; instead, you should watch this Khan Academy video.

 

 

21.2 – Overview of the model

Consider the BS calculator as a “black box,” which accepts a variety of inputs and produces a variety of outputs. The majority of the market data for the options contract must be provided as inputs, and the outputs are the Option Greeks.

 

This is how the pricing model’s framework operates:

 

 

Spot price, strike price, interest rate, implied volatility, dividend, and the number of days until expiration are the inputs we give the model.
The pricing model generates the necessary mathematical calculation and outputs a number of results.

 

The output includes all Option Greeks as well as the call and put option’s theoretical price for the chosen strike.
The schematic of a typical options calculator is shown in the following illustration:

 

The spot price at which the underlying is trading is known as the spot price. Note that we can even substitute the futures price for the spot price. When the underlying of the option contract is a futures contract, we use the futures price. The currency options and the commodity options are frequently based on futures. Utilize the spot price exclusively for equity option contracts.

 

Interest Rate: This is the market-prevailing, risk-free rate. For this, use the RBI’s 91-day Treasury bill rate. The rate is available on the RBI website’s landing page, which is highlighted in the example below.

 

Dividend – This is the anticipated dividend per share for the stock, assuming it goes ex-dividend during the expiration period. Assume, for instance, that you want to determine the Option Greeks for the ICICI Bank option contract as of today, September 11th. Consider that ICICI Bank will begin paying a dividend of Rs. 4 on September 18th. Since the September series expires on September 24, 2015, the dividend in this instance would be Rs. 4.

 

 

Days remaining before expiration – This is the remaining number of calendar days.

 

 

Volatility: You must enter the implied volatility of the option here. You can always extract the implied volatility information by looking at the option chain that NSE provides. Here is an illustration of a snap.

 

Let’s use this knowledge to determine the ICICI 280 CE option Greeks.

 

Price at Spot = 272.7

 

Interest rate equals 7.4769 %

 

 

Division = 0

 

 

Days until expiration = 1 (today is 23rd September, and expiry is on 24th September)

 

 

Volatility is equal to 43.55%

 

We must enter this data into a typical Black & Scholes Options calculator once we have it. You can calculate the Greeks using the calculator found on our website at https://zerodha.com/tools/black-scholes.

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Note the following on the output side:

 

Calculated is the premium for 280 CE and 280 PE. According to the B&S options calculator, this is the theoretical option price. Ideally, this should coincide with the market’s current option price.

 

All of the Options Greeks are listed below the premium values.

 

I’m assuming that by this point you are fairly familiar with the meanings and applications of each Greek word.

 

 

One last thing to remember about option calculators: they are primarily used to figure out the Option Greeks and the theoretical option price. Due to differences in input assumptions, minor differences can occasionally occur. It is advantageous to allow for the inescapable modelling errors for this reason. But generally speaking, the

21.3 – Put Call Parity

While we are discussing the topic on Option pricing, it perhaps makes sense to discuss  ‘Put Call Parity’ (PCP). PCP is a simple mathematical equation which states –

Put Value + Spot Price = Present value of strike (invested to maturity) + Call Value.

The equation above holds true assuming –

  1. Both the Put and Call are ATM options
  2. The options are European
  3. They both expire at the same time
  4. The options are held till expiry

 

For people who are not familiar with the concept of Present value, I would suggest you read through this – http://zerodha.com/varsity/chapter/dcf-primer/ (section 14.3).

 

Assuming you are familiar with the concept of Present value, we can restate the above equation as –

P + S = Ke(-rt) + C

Where, Ke(-rt) represents the present value of strike, with K being the strike itself. In mathematical terms, strike K is getting discounted continuously at rate of ‘r’ over time‘t’

Also, do realize if you hold the present value of the strike and hold the same to maturity, you will get the value of strike itself,

 

hence the above can be further restated as –

 

 

Put Option + Spot Price = Strike + Call options

 

 

Why then should the equality persist? Think about two traders, Trader A and Trader B, to help you better understand this.


A trader holds an ATM. 1 share of the underlying stock and a put option (left hand side of PCP equation)

Trader B is in possession of a call option and cash equal to the strike (right hand side of PCP equation)

 

 

Given this situation, both traders should profit equally under the PCP (assuming they hold until expiry). Let’s enter some data to assess the equation:

 

Underlying = Infosys
Strike = 1200
Spot = 1200

Trader A holds = 1200 PE + 1 share of Infy at 1200
Trader B holds = 1200 CE + Cash equivalent to strike i.e 1200

Assume upon expiry Infosys expires at 1100, what do you think happens?

 

Trader A’s Put option becomes profitable and he makes Rs.100 however he loses 100 on the stock that he holds, hence his net pay off is 100 + 1100 = 1200.

 

 

Trader B’s Call option becomes worthless, hence the option’s value goes to 0, however he has cash equivalent to 1200, hence his account value is 0 + 1200 = 1200.

 

 

Let’s take another example, assume Infy hits 1350 upon expiry, lets see what happens to the accounts of both the trader’s.

 

 

Trader A = Put goes to zero, stock goes to 1350/-
Trader B = Call value goes to 150 + 1200 in cash = 1350/-

 

 

So it is obvious that the equations hold true regardless of where the stock expires, resulting in the same amount of profit for both traders A and B.

 

 

All right, but how would you create a trading strategy using the PCP? You’ll have to wait until the next module, which is about “Option Strategies,” to find out, J. There are still two chapters left in this module before we begin the module on option strategies.

 

 

 Call & put options

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Options

• Basics of call options
• Basics of options jargon
• How to buy a call option
• How to buy/sell call option
• Buying put option
• Selling put option
• Call & put options
• Greeks & calculator

• Option contract
• The option greeks
• Delta
• Gamma
• Theta
• All volatility
• Vega

7.1 – Remember these graphs

Over the last few chapters, we have looked at two basic option type’s, i.e. the ‘Call Option’ and the ‘Put Option’. Further, we looked at four different variants originating from these 2 options –

  1. Buying a Call Option
  2. Selling a Call Option
  3. Buying a Put Option
  4. Selling a Put Option

 

By combining these 4 variations, a trader can develop a wide range of effective strategies, which are often referred to as “Option Strategies.” Consider it this way: Just as a talented artist can produce intriguing paintings when given a colour scheme and a blank canvas, a talented trader can use these four option variants to produce trades of exceptional quality. The only prerequisites for making these option trades are creativity and intelligence. Therefore, it is crucial to have a solid understanding of these four options variants before we delve further into options. This is the case, so let’s quickly review what we’ve learned so far in this module.

 

Please find below the pay off diagrams for the four different option variants –

 

 

 

Let’s start from the left side. You’ll notice that the call option (buy) and call option (sell) pay off diagrams are stacked one on top of the other. They both appear to be a mirror image if you pay close attention to the payoff diagram. The opposite risk-reward characteristics of an option buyer and seller are highlighted by the payoff’s mirror image. The call option seller makes the most money when the call option buyer suffers the greatest loss. Similar to how the call option seller can lose as much as they want, so too does the call option buyer have limitless potential for profit.

 

 

The call option (buy) and put option (sell) payoffs are next to one another. This is to emphasise that only when the market is expected to rise do either of these option variants yield a profit. In other words, avoid buying or selling options when you believe there is a chance that the markets will decline. In other words, you will definitely lose money in such circumstances and won’t make any money doing it. Of course, there is a volatile aspect to this that we have not yet discussed; we will do so in the future. I’m talking about volatility because it affects option premiums, which is why it matters.

 

The pay off diagrams for the Put Option (sell) and the Put Option (buy) are finally stacked one below the other on the right. It is obvious that the payoff diagrams are mirror images of one another. The fact that the maximum loss of the put option buyer is also the maximum profit of the put option seller is highlighted by the payoff’s mirror image. Similar to how the put option seller has the greatest chance of losing money, so does the put option buyer.
Here is a table that summarises the option positions furthermore.

 

 

It would be beneficial if you kept in mind that purchasing an option also constitutes taking a “Long” position. Accordingly, purchasing a call option and purchasing a put option are referred to as long calls and long puts, respectively.

Similar to how selling an option is referred to as a “Short” position. Accordingly, selling a call option and selling a put option are both referred to as short positions, short calls and short puts.

Another crucial point to remember is that there are two situations in which you can purchase an option:

 

You purchase to establish a new option position.
You buy with the intention of covering an open short position.

 

 

Only when you are opening a new buy position is the position referred to as a “Long Option.” It is simply referred to as a “square off” position if you are purchasing with the aim of covering an existing short position.

Similarly, there are two situations in which you can sell an option:

You sell with the intention of opening a new short position.
You sell with the intention of closing an open long position.
Only when you are writing a new sell (option) position is the position referred to as a “Short Option.” It is simply referred to as a “square off” position if you are selling with the goal of closing an existing long position.

 

 

 

7.2 – Option Buyer in a nutshell

I’m confident that by this point, you are familiar with the call and put option from both the buyer’s and seller’s perspectives. Before we continue with this module, I believe it is best to go over a few important points once more.

 

 

Only when we anticipate the market to move strongly in a particular direction does buying an option (call or put) make sense. In fact, the market should move away from the chosen strike price for the option buyer to profit. We will discover later that choosing the proper strike price to trade is a significant task. For now, keep in mind the following important details:

 

The formula for P&L (Long call) at expiration is P&L = Max [0, (Spot Price – Strike Price)] – Paid Premium
P&L (Long Put) is calculated as [Max (0, Strike Price – Spot Price)] at expiration. – Paid Premium

 

Only when the trader intends to hold the long option until expiration is the aforementioned formula applicable.

 

Only on the expiry day is the intrinsic value calculation that we looked at in the previous chapters applicable. Throughout the series, we CANNOT use the same formula.

 

When the trader intends to close the position out well before expiration, the P&L calculation is altered.
The amount of the premium paid determines how much risk the option buyer is exposed to. He does, however, have limitless potential for profit.

7.2 – Option seller in a nutshell

Option writers are another name for option sellers (call or put). The P&L experiences of buyers and sellers are completely different. When you anticipate that the market will remain stable, fall below the strike price (for calls), rise above the strike price, selling an option makes sense (in case of put option).

 

 

I want you to recognise that markets are marginally in favour of option sellers, all things being equal. This is due to the fact that the market must be either flat or moving in the desired direction for the option sellers to be profitable (based on the type of option). However, the market must move in a specific direction for the option buyer to be profitable. There are undoubtedly two favourable market circumstances.

 

Here are a few key points you need to remember when it comes to selling options –

  1. P&L for a short call option upon expiry is calculated as P&L = Premium Received – Max [0, (Spot Price – Strike Price)]
  2. P&L for a short put option upon expiry is calculated as P&L = Premium Received – Max (0, Strike Price – Spot Price)
  3. Of course the P&L formula is applicable only if the trader intends to hold the position till expiry
  4. When you write options, margins are blocked in your trading account
  5. The seller of the option has unlimited risk but minimal profit potential (to the extent of the premium received)

 

Perhaps this is the case with Nassim Nicholas Taleb’s statement that “Option writers eat like a chicken but shit like an elephant” in his book “Fooled by Randomness”. In other words, option writers sell options for small, consistent returns, but they typically lose a lot of money when a catastrophe strikes.

 

 

I do, however, hope that you now have a solid understanding of how a call and put option operate. You should be aware that this module will now concentrate on the moneyness of an option, premiums, option pricing, option Greeks, and strike choice. Once we are familiar with these concepts, we will go over the call and put option once more. When we do, I’m sure you’ll view the calls and puts in a new way and maybe even get the idea to start options trading professionally.

 

Let’s say that while trading this specific option intraday, you were only able to gain 2 points during this significant swing. Given that the lot size is 1000, this results in sweet profits of Rs 2000. (highlighted in green arrow). In reality, this is exactly what takes place. Trade in premiums occurs. Almost no traders keep options open until they expire. The majority of traders are interested in starting a trade now, square it off in a short period of time (intraday or possibly for a few days), and then profit from changes in the premium. The options are not really exercised until they expire.

 

 

In fact, you might find it interesting to know that an average return of 100% while trading options is not at all unusual. Don’t, however, let what I just said get you too excited; in order to consistently enjoy such returns, you must gain a keen understanding of your available options.

 

 

This is an option contract for IDEA Cellular Limited with a strike price of 190, an expiration date of April 30, 2015, and a European Call Option as the option type. These specifics are denoted by a blue box. The OHLC data, which is obviously very interesting, can be seen below this.

 

 

The 190CE premium hit a low of Rs. 0.30 and closed the day at Rs. 8.25. I’ll skip the percent calculation because it produces an absurd number for intraday trading. The 2 point premium capture translates to Rs. 4000 in intraday profits, which is enough for that nice dinner at a restaurant. However, suppose you were a seller of the 190 call option intraday and you managed to capture just 2 points again.

 

I’m trying to make the point that most traders only trade options to profit from variations in premium. Holding until expiration is not really a concern. By no means do I mean to imply that you do not need to hold until expiration; in some circumstances, I do hold options until expiration. In general, option sellers rather than option buyers tend to hold contracts until expiration. This is due to the fact that if you write an option for Rs. 8/-, you will only benefit from the full premium, or Rs. 8/-, at expiration.

 

Having said that, you might have a few fundamental questions now that you know that traders prefer to trade only the premiums. How come premiums change? What is the reason behind the premium change? How can I forecast how premiums will change? Who determines what a particular option’s premium price should be?

 

The core of option trading, then, is determined by these questions and the answers to them. Let me assure you that if you can master these aspects of an option, you will put yourself on a professional path to trading options.

 

 

To give you a heads up, understanding the four forces that simultaneously exert their influence on option premiums and cause the premiums to vary will help you find the answers to all of these questions. Imagine this as a ship travelling through the ocean. The speed of the ship depends on a number of factors, including wind speed, sea water density, sea pressure, and the ship’s power (assuming it has an equivalent to the option premium). Some forces tend to make the ship move faster, while others tend to make it move slower. The ship struggles against these forces until it attains the ideal sailing speed.

 

 

Likewise the premium of the option depends on certain forces called as the ‘Option Greeks’. Crudely put, some Option Greeks tends to increase the premium, while some try to reduce the premium. A formula called the ‘Black & Scholes Option Pricing Formula’ employs these forces and translates the forces into a number, which is the premium of the option.

 

Try and imagine this – the Option Greeks influence the option premium; however, the Option Greeks itself are controlled by the markets. As the markets change on a minute by minute basis, therefore the Option Greeks change and therefore the option premiums!

 

In the future, in this module, we will understand each of these forces and their characteristics. We will understand how the force gets influenced by the markets and how the Option Greeks further influence the premium

 

 

Therefore, the ultimate goal would be to be –

To understand the impact of the Option Greeks on premiums

 

To determine how the premiums are set while accounting for Option Greeks’ impact

 

Finally, we must choose strike prices to trade carefully while keeping the Greeks and pricing in perspective.
Learning about the “Moneyness of an Option” is one of the most important things we should understand before attempting to learn the option Greeks. The same will be done in the following chapter.

 

 

Just a quick reminder that while we’ll do our best to simplify, the topics in the future will likely become a little more complicated. Please be thorough with all the concepts as we do that, as we would appreciate it.

 Selling put option

by

Options

• Basics of call options
• Basics of options jargon
• How to buy a call option
• How to buy/sell call option
• Buying put option
• Selling put option
• Call & put options
• Greeks & calculator

• Option contract
• The option greeks
• Delta
• Gamma
• Theta
• All volatility
• Vega

6.1 – Building the case

An option seller and a buyer are similar to two sides of the same coin, as we previously understood. They view markets in diametrically opposed ways. According to this, the put option seller must have a bullish view of the markets if the put option buyer is bearish about the market. Remember that we examined the Bank Nifty chart in the previous chapter? We’ll do so again, but this time from the viewpoint of a put option seller.

 

The put option seller’s typical thought process would be as follows:

Trading for Bank Nifty is at 18417.
a week ago Bank Nifty tested the 18550 level of resistance (resistance level is highlighted by a green horizontal line)
Since there is a price action zone at this level that is evenly spaced in time, 18550 is regarded as resistance (for people who are not familiar with the concept of resistance I would suggest you read about it here)
The price action zone is highlighted in a blue rectangular box.
For three consecutive attempts, Bank Nifty has made an effort to break through the resistance level.

 

All it needs is one strong push—possibly the announcement of respectable results by a sizable bank. ICICI, HDFC, and

 

SBI is anticipated to announce results soon.)

 

A favourable cue and a move above the resistance will send the Bank Nifty on an ascent.

 

So it might make sense to write the Put Option and collect the premiums.

 

At this point, you might be wondering why write (sell) a put option rather than simply purchase a call option if the outlook is bullish.

 

Well, the decision to either buy a call option or sell a put option really depends on how attractive the premiums are. At the time of taking the decision, if the call option has a low premium then buying a call option makes sense, likewise if the put option is trading at a very high premium then selling the put option (and therefore collecting the premium) makes sense. Of course to figure out  what exactly to do (buying a call option or selling a put option) depends on the attractiveness of the premium, and to judge how attractive the premium is you need some background knowledge on ‘option pricing’. Of course, going forward in this module we will understand option pricing

 

 

Assume the trader decides to write (sell) the 18400 Put option and receive Rs. 315 as the premium in light of the foregoing considerations. Let’s observe the P&L behaviour for a Put Option seller as usual and draw some conclusions.

It’s important to remember that margins are blocked in your account when you write options, whether they are Calls or Puts. We have talked about this viewpoint here; we ask that you do the same.

6.2 – P&L behavior for the put option seller

Please keep in mind that whether you are writing a put option or purchasing a put option, the intrinsic value of the option is still calculated in the same way. The P&L calculation does, however, change, as we will soon discuss. On the expiration date, we’ll make a variety of assumptions to determine how the P&L will behave.

 

 

As we have done the same for the previous three chapters, I would assume that by this point you will be able to generalise the P&L behaviour upon expiry with ease. The generalisations are as follows (pay close attention to row 8 because that is the trade’s strike price):

 

 

Selling a put option is done in order to receive the premiums and profit from the market’s bullish outlook. As a result, the profit (premium collected) remains constant at Rs. 315 so long as the spot price exceeds the strike price.

 

Generalization 1: Put option sellers make money as long as the strike price is met or exceeded by the spot price. To put it another way, only sell a put option if you are bullish on the underlying or when you think it will stop falling.
The position begins to lose money as soon as the spot price drops below the strike price (18400). There is obviously no limit to the amount of loss the seller can sustain in this situation, and it is theoretically unlimited.

 

Generalization 2: When the spot price drops below the strike price, the seller of a put option may incur an unlimited loss.

 

Here is a general formula using which you can calculate the P&L from writing a Put Option position. Do bear in mind this formula is applicable on positions held till expiry.

P&L = Premium Recieved – [Max (0, Strike Price – Spot Price)]

Let us pick 2 random values and evaluate if the formula works –

  • 16510
  • 19660

 

@16510 (spot below strike, position has to be loss making)

= 315 – Max (0, 18400 -16510)

= 315 – 1890

= – 1575

@19660 (spot above strike, position has to be profitable, restricted to premium paid)

= 315 – Max (0, 18400 – 19660)

= 315 – Max (0, -1260)

=  315

 

 

Clearly both the results match the expected outcome.

Further, the breakdown point for a Put Option seller can be defined as a point where the Put Option seller starts making a loss after giving away all the premium he has collected –

Breakdown point = Strike Price – Premium Received

For the Bank Nifty, the breakdown point would be

= 18400 – 315

= 18085

 

 

So as per this definition of the breakdown point, at 18085 the put option seller should neither make any money nor lose any money. Do note this also means at this stage, he would lose the entire Premium he has collected. To validate this, let us apply the P&L formula and calculate the P&L at the breakdown point –

 

= 315 – Max (0, 18400 – 18085)

= 315 – Max (0, 315)

= 315 – 315

=0

The result obtained is clearly in line with the expectation of the breakdown point.

 

 

 

 

6.3 – Put option seller’s Payoff

The generalisations we have made about the Put option seller’s P&L should be visible if we connect the P&L points (as shown in the earlier table) and create a line chart. Please find the same below.

 

Here are a few things that you should appreciate from the chart above, remember 18400 is the strike price –

  1. The Put option seller experiences a loss only when the spot price goes below the strike price (18400 and lower)
  2. The loss is theoretically unlimited (therefore the risk)
  3. The Put Option seller will experience a profit (to the extent of premium received) as and when the spot price trades above the strike price
  4. The gains are restricted to the extent of premium received
  5. At the breakdown point (18085) the put option seller neither makes money nor losses money. However at this stage he gives up the entire premium he has received.
  6. You can observe that at the breakdown point, the P&L graph just starts to buckle down – from a positive territory to the neutral (no profit no loss) situation. It is only below this point the put option seller starts to lose money.

 

And with these ideas, you’ve hopefully grasped the essence of selling put options. In the previous chapters, we examined the call option and the put option from the viewpoints of the buyer and the seller. We will briefly review the same in the following chapter before moving on to other crucial Options concepts.

Iron condor

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Topics 4

Basics of stock market

• Induction
• Bull call spread
• Bull put spread
• Call ration Back spread
• Bear call ladder
• Synthetic long & Arbitrage
• Bear put spread

• Bear call spread
• put ration back spread
• Long straddle
• Short straddle
• Max pain & PCR ratio
• Iron condor

learning sharks stock market institute

14.1 – New margin framework

We are living in fascinating times, especially if you trade options in India.

The NSE’s new margin framework, which goes into effect on June 1, 2020, reduces the margin requirement for the hedged position.

You might wonder what a hedged position is. Although we have already covered this topic extensively in this module, we will quickly go over it again to ensure that this chapter is comprehensive.

Let’s say you are not wearing a helmet and are riding a bike at 75 kilometers per hour. You suddenly encounter a pothole and slam on the breaks to slow down, but it’s too late; you crash and lose balance. What is the likelihood of suffering a head injury? Quite high considering you aren’t wearing a helmet. Consider the same scenario now, but this time you choose to wear a helmet instead of being carefree. How likely is it that you’ll sustain head injuries given the crash? The low likelihood, right? because wearing a helmet keeps you safe from harm.

This means that whenever you start a hedged strategy, your broker will block fewer margins than would be needed for a naked position.

In the new margin framework, NSE essentially made the same suggestion.

For more information, see this NSE presentation.

The presentation is quite complex, but unless you really want to, you won’t need to scratch your head to understand it.

There are three main lessons to be learned from the new margin policy from the perspective of a trader. All three are highlighted on a single slide in this presentation. Here is a quick summary:

Starting from the top –

  • Portfolio 1 – Margins have increased for naked unhedged positions to 18.5% from the current 16.7%.

  • Portfolio 2 – 70% reduction in margins for market-neutral positions

  • Portfolio 3 – 80% reduction in margins for spread positions

What does this mean for you as a trader of options?

So some of the practical strategies that on paper looked great but were impossible to implement due to excessive margin requirements, now appear alluring.

I have a trick question for you: Why do you believe the spread position’s margin reduction is greater than that of a neutral market position?

Please consider it and share your thoughts in the comment section.

Given this, I would like to talk about one more options strategy in this module. Previously, I had refrained from doing so because the margin requirement was so high, but that is no longer the case.

learning sharks stock market institute

14.2 – Iron Condor

An alternative setup with four legs is the iron condor. An improvement on the short strangle is the iron condor.

Check out this –

This screenshot was taken using Sensibull’s Strategy Builder. As you can see, I’m attempting to set up a short strangle by selling OTM calls and puts while Nifty is at 9972.9.

9800 Put at 165.25 10100 Dial 145.25.

The fact that both options are written/sold entitles me to the sum of 164.25 + 145.25 = 309.5 in premium.

I would advise you to read this chapter if you are unfamiliar with the strangles.

This short strangle setup has the following payoff:

This strategy is my favorite because it allows me to keep the premium as long as Nifty stays within a range, which it does the majority of the time. Additionally, this is a fantastic way to trade volatility. When you believe that the volatility has increased, which typically happens around significant market events, you would want to sell options and keep the high premiums. Such trades are ideal for short strangles.

Since you sell or write options in a short strangle, you receive a net premium credit. You receive a premium of Rs. 23,288 in this situation.

The exposed ends of short strangles are the only drawback. If the underlying asset changes direction, the strategy bleeds.

For instance, the safety range for this specific short strangle is between 9490 and 10411.

I concur that this is a wide enough range, but markets have shown us that they are capable of making absurd moves very quickly. The most recent crash was COVID-19 in early 2020, which was quickly recovered from.

If you are caught in a market move that is moving so quickly, the potential loss could be enormous and could empty your account. The risk to you and the broker is now quite high because the amount of loss that could occur is limitless. Eventually, this also results in higher margins.

5.3 – Strategy Generalization

which is quite expensive.

This does not, however, mean that you must abandon a quick strangle. The short strangle can be modified to create an iron condor, which is a much better tactic in my opinion.

By closing the ends, an iron condor improvises a short strangle. Consider an iron condor in three sections:

Part 1: Sell a slightly OTM Call and Put option to set up a short strangle.

Part 2: Purchase an additional OTM Call to hedge the short call against a significant market rally.

Part 3: Purchase an additional OTM Put to hedge the short Put against a large market.

An iron condor is a four-legged option strategy as a result. Let’s see how this appears.

Sell a 10100CE at 145.25 and a 9800PE at 165.25 to earn a premium of 310.5 or Rs. 23,288.

Buy 10300 CE at 77 to cover the short position on 10100 CE in part two.

Buy 9600 PE at 105.05 to cover the short 9800 PE in part three.

If you give this some thought, you can see that the long option positions are funded by the short option premium.

Because you purchase two options to hedge against two short options, the profit potential is somewhat diminished –

As you can see, the maximum profit is now Rs. 9,634; however, the decreased profit also results in less stress.

Because I can now see the risk and it isn’t open-ended, the maximum loss is now limited to Rs. 5,366, which in my opinion is awesome.

As long as Nifty stays within a range—in this case, between 9672 and 10228—the profit is constrained. In comparison to the short strangle, observe how the range has decreased.

The iron condor’s payoff is as follows:

Now, what do you think about the risk? The risk here is completely defined. You have clear visibility of the worst-case scenario. So what does it mean to you as a trader, and what does it mean to the broker?

You guessed it right since the risk is defined, the margins are lesser.

Here is where the NSE’s new margin framework is put to use. When compared to the short strangle, which has a margin requirement of Rs. 1.45L, an iron condor only requires you to pay an upfront margin of Rs. 44,303.

Additionally, executing an iron condor was not a very viable option for a retail trader prior to the new margin framework. The margin needed for an Iron Condor was roughly between 2 and 2.2L for these strikes and premiums.

14.3 – Max P&L

There are a few important things you need to remember while executing an iron condor –

  1. The PE and CE that you buy should have even strike distribution from the sold strike. For example, here we have sold 9800 PE and 10,100 CE. We have protected the sold strikes by going long on 9600 PE and 10,300 CE. The difference between 9800 PE and 9600 PE is 200 and 10,100 CE and 10,300 CE is 200. The spread should be even. I cannot protect 9800 PE by buying 9700 PE (difference of 100) and then protect 10,100 CE with 10,300 CE (difference of 200).
  2. The Max loss occurs when the market moves either above long CE i.e. 10,300 CE or moves below long PE i.e. 9,600PE
  3. Spread = 200 i.e. the difference between the sold strike and its protective strike.
  4. Max Profit = Net premium received. In this case, it is 128.45 (9634/75)
  5. Max loss = Spread – Net premium received. In this case, it is 200 – 128.45 = 71.54.

I’d suggest you look at the excel sheet at the end of this chapter for detailed working on this. Please note, I updated the excel sheet 2 days after I wrote this chapter, hence the values are different.

14.4 – ROI and Logistics

You can set up a short strangle and get a premium of Rs. 23,288. For an iron condor, you can get a premium of Rs. 9,643. Undoubtedly, the iron condor offers a much lower premium inflow in terms of absolute rupees. But the ROI shifts in favor of the Iron Condor when you compare it to the margin requirement.

The required margin for a short strangle is Rs. 1,45,090. The ROI is, therefore –

23,288/1,45,090

is 16 percent.

The amount of margin needed for an iron condor is Rs 44,303. The ROI is, therefore –

9,643/44,303

As a trader, you must consider ROI rather than absolute values, and the margin benefit is crucial in this regard.

Here, the order in which trades are executed greatly affects the outcome. Here is the trade sequence for an iron condor, if you are thinking about using one:

Purchase the long OTM call option.

OTM Call option should be sold.

Purchase the far OTM PUT.

OTM PUT option to sell

The key takeaway is that establishing a long position is necessary before beginning a short position.

Why? Because a short option position eats up the margin, the system will request fewer margins for the short position when you have a long position because it knows the risk is contained.

Please be aware that I only

Please note that I have only taken into account the margin blocked when calculating ROI; I have not taken into account the cost of purchasing the options or the payment received when you write an option.

Therefore, traders, as a next step, I’d advise you to choose various strikes for the long positions and observe what happens to the premium payable, breakeven points, and maximum loss.

Please post your thoughts and inquiries below.

For Visit: Click here to know the directions.

Max pain & PCR ratio

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Topics 4

Max pain & PCR ratio

Basics of stock market

• Induction
• Bull call spread
• Bull put spread
• Call ration Back spread
• Bear call ladder
• Synthetic long & Arbitrage
• Bear put spread

• Bear call spread
• put ration back spread
• Long straddle
• Short straddle
• Max pain & PCR ratio
• Iron condor

learning sharks stock market institute

13.1 – My experience with Option Pain theory

The “Options Pain” theory undoubtedly has a place on the never-ending list of controversial market theories. Option Pain, also known as “Max Pain,” has a sizable fan base, in addition, to probably an equal number of detractors. I’ll be open; I’ve participated on both sides. When I first started investing with Option Pain, I was never able to consistently generate income. Over time, though, I discovered ways to improvise on this theory to fit my own risk tolerance, and that produced a respectable outcome. I’ll go over this as well later in the chapter.

Anyway, this is my attempt to explain the Option Pain theory to you and to discuss my likes and dislikes of Max Pain. This chapter can serve as a guide for how to decide which camp you want to be in.

You must be familiar with the idea of “Open Interest” in order to understand Option Pain theory.

So let’s get going.

learning sharks stock market institute

13.2 – Max Pain Theory

Here is a step-by-step explanation of how to determine the Max Pain value. You might find this a little perplexing at this point, but I still advise reading it. Things will become more clear once we use an example.

Step 1: Make a list of the different exchange strikes and note the open interest in calls and puts for each strike.

Step 2: Assume that the market will expire at each of the strike prices you have noted.

Step 3: Assuming the market expires as per the assumption in step 2, figure out how much money is lost by option writers (both call option and put option writers).

Step 4: Total the money that calls and put option writers have lost.

Step 5: Determine the strike at which option writers lose the least amount of money.

The point at which option buyers experience the most suffering is the level at which option writers lose the least amount of money. The market will therefore most likely end at this price.

Let’s use a very straightforward example to illustrate this. I’ll assume there are only 3 Nifty strikes available in the market for the purposes of this example. I have noted the open interest for the respective strike for both call and put options.

Situation 1: Assume that the market closes at 7700

Keep in mind that you will only lose money when writing a call option if the market rises above the strike. Similarly, you will only lose money when the market moves below the strike price when you write a put option.

Therefore, none of the call option writers will experience a loss if the market expires at 7700. Therefore, the premiums received by call option writers for the 7700, 7800, and 7900 strikes will be kept.

The writers of put options, however, will have difficulties. The 7900 PE writers will be discussed first.

7900 PE writers would lose 200 points at the 7700 expiries. OI being 2559375, the loss in rupees would be equal to –

= 200 * 2559375 = Rs.5,11,875,000/-

7800 PE writers would suffer a 100 loss.

= 100 * 4864125 = Rs.4,864,125,000/-

It won’t cost 7700 PE writers any money.

Therefore, if the markets expire at 7700, the total amount of money lost by option writers would be –

Call option writers’ total losses plus put option writers’ total losses

= 0 + Rs.511875000 + 4,864125000 = Rs.9,98,287,500/-

Remember that the total amount of money lost by call option writers equals the sum of the losses suffered by writers of 7700 CE, 7800 CE, and 7900 CE.

Similarly, the total amount of money lost by put option writers is equal to the sum of the losses of the writers of the 7700 PE, the 7800 PE, and the 7900 PE.

Scenario 2: Assume that the market closes at 7800.

The writers of the following call options would lose money at 7800:

Using its Open, 7700 CE writers would lose 100 points.

get the loss’s rupee value.

100*1823400 = Rs.1,82,340,000/-

Sellers of the 7800 CE and 7900 CE would both make money.

The seller of the 7700 and 7800 PE wouldn’t suffer a loss.

The loss in rupees would be equal to 100 points for the 7900 PE, multiplied by the open interest.

100*2559375 = Rs.2,55,937,500/-

Therefore, when the market expires at 7800, the total loss for option writers would be –

= 182340000 + 255937500

= Rs.4,38,277,500/-

Scenario 3 – Assume markets expire at 7900

At 7900, the following call option writers would lose money –

7700 CE writer would lose 200 points, the Rupee value of this loss would be –

200 *1823400 = Rs.3,646,800,000/-

7800 CE writer would lose 100 points, and the Rupee value of this loss would be –

100*3448575 = Rs.3,44,857,500/-

7900 CE writers would retain the premiums received.

Since market expires at 7900, all the put option writers would retain the premiums received.

So therefore the combined loss of option writers would be –

= 3646800000 + 344857500 = Rs. 7,095,375,000/-

So at this stage, we have calculated the total Rupee value loss for option writers at every possible expiry level. Let me tabulate the same for you –

get the loss’s rupee value.

100*1823400 = Rs.1,82,340,000/-

We can quickly determine the point at which the market is likely to expire now that we have determined the combined loss that option writers would sustain at various expiry levels.

According to the theory of option pain, the market will expire at a point where option sellers will experience the least amount of suffering (or loss).

The combined loss at this point (7800), which is significantly less than the combined loss at 7700 and 7900, is approximately 43.82 Crores, as can be seen from the table above.

That is all there is to the calculation. For the sake of simplicity, I’ve only used 3 strikes in the example. 

For all the available strikes, we assume the market would expire at that point and then compute the Rupee value of the loss for CE and PE option writers. This value is shown in the last column titled “Total Value”.  Once you calculate the total value, you simply have to identify the point at which the least amount of money is lost by the option writer. You can identify this by plotting the ‘bar graph’ of the total value. The bar graph would look like this –

As you can see, the 7800 strike is where option writers would lose the least money, so in accordance with the theory of option pain, this is the strike where the market for the May series is most likely to expire.

How can you put this information to use now that you’ve determined the expiry level? Well, there are many applications for this knowledge.

The majority of traders identify the strikes they can write using this maximum pain level. Since 7800 is the anticipated expiration level in this scenario, one can choose to write call options above 7800 or put options below 7800 and keep all of the premiums.

As a result, I eventually modified the traditional option pain theory to fit my risk tolerance. What I did was as follows:

Every day, the OI values change. As a result, the option pain may suggest 8000 as the expiry level on May 20 and 7800 as the expiry level on May 10. To perform this calculation, I froze on a specific day of the month. When there were 15 days left until expiration, I preferred to do this.

In accordance with the standard option pain method, I determined the expiry value.
I would include a “safety buffer” of 5%. The theory suggests 7800 as the expiry at 15 days, so I would then add a 5 percent safety buffer. As a result, the expiration value would be 7800 plus 5% of 7800.

The market could end anywhere between 7800 and 8200, in my opinion.
I would create strategies with this expiration range in mind, with writing call options beyond 8200 being my favourite.
Simply put,

I wouldn’t write a put option because panic spreads more quickly than greed. This implies that markets may decline before rising.

I would typically refrain from averaging during this time and instead hold the sold options until they expired.

13.5 – The Put Call Ratio

Calculating the Put Call Ratio is a fairly straightforward process. The ratio enables us to determine whether the market is extremely bullish or bearish. The PCR test is typically used as a contrarian indicator. In other words, if the PCR shows extreme bearishness, we expect the market to turn around, so the trader adopts a bullish stance. Likewise, traders anticipate a market reversal and decline if the PCR shows extreme bullishness.

Simply dividing the total open interest of Puts by the total open interest of Calls yields the PCR formula. The outcome typically ranges in and around one. Look at the illustration below:

As of 10th May, the total OI of both Calls and Puts has been calculated. Dividing the Put OI by Call OI gives us the PCR ratio –

37016925 / 42874200 =

0.863385

The following interpretation is correct:

If the PCR value is higher than 1, say 1.3, it means that more puts than calls are being purchased. This indicates that the markets have become very bearish and are thus somewhat oversold. Search for reversals and anticipate an increase in the markets.

Low PCR values, such as 0.5 and below, show that more calls than puts are being purchased. This indicates that the markets have become very bullish and are thus somewhat overbought. One can watch for reversals and anticipate a decline in the markets.
It is possible to attribute all values between 0.5 and 1 to normal trading activity, so they can all be disregarded.

This is obviously a general approach to PCR. It would be sensible to identify these extreme values by historically plotting the daily PCR values over, say, a period of one or two years. For instance, a value of 1.3 for the Nifty can signify extreme bearishness, whereas 1.2 for the Infy could mean the same thing. You must understand this, so backtesting is helpful.

Why PCR is used as a contrarian indicator may be a mystery to you. The reason for this is a little difficult to understand, but the general consensus is that if traders are bullish or bearish, then the majority of them have already taken their respective positions (hence a high/low PCR), and there aren’t many other players who can enter and move the positions in the desired direction. Therefore, when the position eventually squares off, the stock or index will move in the opposite direction.

That’s PCR for you, then. There are numerous variations of this that you may encounter. Some prefer to take volumes instead of OI, while others prefer to take the total traded value. But I don’t believe that overanalyzing PCR is necessary.

13.6 – Final thoughts

And with that, I’d like to conclude the 36 chapters and two modules long module on options!

In this module, we have covered nearly 15 different option strategies, which, in my opinion, is more than enough for retail traders to engage in profitable options trading. Yes, you will come across many fancy option strategies in the future; perhaps your friend will suggest one and demonstrate its technicalities but keep in mind that fancy does not necessarily equate to profitable. The best tactics can sometimes be straightforward, elegant, and straightforward to use.

The information we’ve provided in Modules 5 and 6 are written with the goal of providing you with a clear understanding of what options trading is.

What can be accomplished with options trading and what cannot? What is necessary and what is not have both been considered and discussed. Since these two modules cover the majority of your questions and concerns about options, they are more than enough.

So kindly read through the information provided here at your own pace, and I’m confident you’ll soon begin trading options the right way.

Last but not least, I sincerely hope you enjoy reading this as much as I did writing it for you.

Good luck and keep making money!

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Short straddle

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Topics 4

Short straddle

Basics of stock market

• Induction
• Bull call spread
• Bull put spread
• Call ration Back spread
• Bear call ladder
• Synthetic long & Arbitrage
• Bear put spread

• Bear call spread
• put ration back spread
• Long straddle
• Short straddle
• Max pain & PCR ratio
• Iron condor

11.1 – Context

In the previous chapter we understood that for the long straddle to be profitable, we need a set of things to work in our favor, reposting the same for your quick reference –

  1. The volatility should be relatively low at the time of strategy execution

  2. The volatility should increase during the holding period of the strategy

  3. The market should make a large move – the direction of the move does not matter

  4. The expected large move is time bound, should happen quickly – well within the expiry

  5. Long straddles are to be set up around major events, and the outcome of these events is to be drastically different from the general market expectation.

Although it is acknowledged that the long straddle does not depend on the direction of the market, this is a very difficult bargain. Considering the five points listed, it can be difficult to make the long straddle work in your favour. Remember that the breakdown in the previous chapter was at 2%; add another 1% for desired profits, and we are essentially looking for at least a 3% movement on the index. According to my experience, it can be difficult to anticipate the market’s frequent changes. In fact, just for this reason, I pause every single time I need to start a long straddle.

I’ve seen a lot of traders carelessly set up long straddles in the mistaken belief that they are protected from the direction of the market. However, in reality, they lose money in a long straddle because of time delays and the market’s overall movement (or lack thereof). Please note that I’m not trying to convince you not to use the long straddle; nobody contests its simplicity and elegance. When all five of the aforementioned criteria are met, it functions incredibly well. The likelihood of these 5 points aligning with one another is the only problem I have with long straddle.

Consider this: A number of factors prevent the long straddle from being profitable. Therefore, as a continuation of this, the same set of factors “should” favour the “Short Straddle,” which is the opposite of a long straddle.

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11.2 – The Short Straddle

Although many traders fear the short straddle (as losses are uncapped), I personally prefer trading the short straddle on certain occasions over its peer strategies. Anyway, let us quickly understand the setup of a short straddle, and how its P&L behaves across various scenarios.

Setting up a short straddle is quite straightforward – as opposed to buying the ATM Call and Put options (like in a long straddle) you just have to sell the ATM Call and Put option. Obviously, the short strategy is set up for a net credit, as when you sell the ATM options, you receive the premium in your account.

Here is an example, consider Nifty is at 7589, so this would make the 7600 strike ATM. The option premiums are as follows –

  • 7600 CE is trading at 77

  • 7600 PE is trading at 88

So the short straddle will require us to sell both these options and collect the net premium of 77 + 88 = 165.

Please keep in mind that the options must have the same underlying, the same expiration date, and of course, the same strike. Let’s calculate the P&L under various market expiry scenarios assuming that you have already executed this short straddle.

Situation 1: The market closes at 7200 (we lose money on the put option)

In this case, the put option’s loss is so sizable that it consumes the premium that both the CE and the PE collected, resulting in a net loss. At 7200 –

As a result of the fact that 7600 CE will expire worthlessly, we keep the premium received, meaning that 77 7600 PE will have an intrinsic value of 400. When the premium received, Rs. 88, is taken into account, we lose 400 – 88 = – 312.
312 – 77 = – 235 would be the overall loss.
As you can see, the loss in the put option equals the gain in the call option.

The market expires at 7435 in scenario two (lower breakdown)

In this instance, the strategy is in a neutral financial position.

Since 7600 CE would expire worthlessly, the premium is kept. Profit is Rs. 77 here.
Since we received Rs. 88 in premium on an intrinsic value of 165 for 7600 PE, our loss would be 165 – 88 = -77.
The loss in the put option completely cancels out the gain in the call option. Consequently, at 7435, we are in the black.

Situation 3: The market closes at 7600 (at the ATM strike, maximum profit)

The best result for a short straddle is this one. The situation is simple at 7600 because both the call and put options would expire worthlessly and the premiums from both the call and put options would be kept. The gain, in this case, would equal the net premium received, or Rs. 165.

This indicates that in a short straddle, you profit the most when the markets remain static.

The market expires at 7765 in scenario 4. (upper breakdown)

This is comparable to the second scenario we looked at. At this point, the strategy achieves parity at a point above the ATM strike.

After accounting for the premium of Rs. 77 that was received, 7600 CE would have an intrinsic value of Rs. 165, meaning that we would lose Rs. 88. (165 – 77)
7600 PE would expire worthlessly, so the premium, which is equal to Rs. 88, is kept.

We are neither making money nor losing money because the profit from the 7600 PE is offset by the loss from the 7600 CE.

This is undoubtedly the upper breakdown point.

In this case, the market is obviously much larger than the 7600 ATM threshold. Both the loss and the call option premium would increase.7600 PE will expire worthlessly, so the premium, which is equal to Rs. 88, is kept.

After accounting for the premium of Rs. 77 received, the 7600 CE will have an intrinsic value of Rs. 400 at 8000, meaning that we will lose Rs. 323. ( 400 -77)
Given that we paid Rs. 88 as the put option premium, our loss would be equal to 88 – 323 = –235.

As you can see, the call option’s loss is sizable enough to cancel out the total premiums paid.

The payoff table for various market expiries is shown below.

11.3 – Case Study (repost from previous module)

He decided to proceed with the 1140 strike because Infosys was trading close to Rs. 1142/- per share (ATM).

Here is the snapshot taken at the time the trade was started:

The 1140 CE was trading at 48/- on October 8 around 10:35 AM, and the implied volatility was 40.26 percent. The implied volatility was 48 percent and the 1140 PE was trading at 47/-. 95 dollars per lot were received in total premium.

The market anticipated that Infosys would release a respectable set of financial results. In fact, the results were better than anticipated; the specifics are as follows:

“Information Systems reported a net profit of $519 million for the July-September quarter, up from $511 million in the same period last year. The amount of revenue increased by 8.7% to $2.39 billion. Revenue increased by 6% sequentially, comfortably exceeding market expectations of growth of 4- 4.5%.

On revenues of Rs. 15,635 crores, which was up 17.2 percent from the previous year, net profit increased by 9.8 percent to Rs. 3398 crores in rupees. Economic Times is the source.

Three minutes after the market opened and around the time of the announcement, at 9:18 AM, this trader was able to close the trade.

5.4 – Effect of Greeks

Since we are dealing with ATM options, the delta of both CE and PE would be around 0.5. We could add the deltas of each option and get a sense of how the overall position deltas behave.

Given that we are short, the delta for the 7600 CE would be -0.5.
Since we are short, the delta for the 7600 PE Delta would be +0.5.
Delta added together would be -0.5 + 0.5 = 0.
The total delta shows that the tactic is neutral in terms of direction. Keep in mind that a delta-neutral straddle can be either long or short. Delta neutral suggests that the profits are uncapped for long straddles and the losses are uncapped for short straddles.

Here’s something to consider: When you start a straddle, you are undoubtedly delta neutral. But will your position still be delta neutral as the markets change? If so, why do you believe that? If the answer is no, is there a way to maintain a neutral position delta?

I can assure you that your understanding of options is far superior to that of 90% of market participants if you can structure your thinking around these ideas. You must take a small mental step forward and enter second-level thinking in order to respond to these straightforward questions.

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Long straddle

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Topics 4

Long straddle

Basics of stock market

• Induction
• Bull call spread
• Bull put spread
• Call ratio Back Spread
• Bear call ladder
• Synthetic long & Arbitrage
• Bear put spread

• Bear call spread
• put ration back spread
• Long straddle
• Short straddle
• Max pain & PCR ratio
• Iron condor

10.1 – The Directional dilemma

learning sharks stock market institute

How often do you find yourself in a position where you decide to trade long or short after giving it a lot of thought, only to see the market move in the exact opposite direction shortly thereafter? Your entire plan, strategy, work, and resources are wasted. I’m positive that we have all been in a situation like this. In fact, this is one of the main reasons why most experienced traders adopt a variety of directional betting strategies that are resistant to the unpredictability of the market.

Market Neutral or Delta Neutral strategies are those whose profitability is largely independent of market direction. In the upcoming chapters, we’ll learn about some market-neutral tactics and how Such trading tactics can be used by everyday retail traders. Let’s start off with a “Long Straddle.”

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10.2 – Long Straddle

The simplest market-neutral strategy to use is probably the long straddle. The direction that the market moves has no bearing on the P&L once it has been implemented. The market must move, regardless of the direction, it moves in. A positive P&L is produced as long as the market is moving (regardless of the direction it is moving). All that is required to execute a long straddle is –

  1. Buy a Call option
  2. Buy a Put option

Ensure –

  1. Both the options belong to the same underlying
  2. Both the options belong to the same expiry
  3. Belong to the same strike

Here is an illustration of how to execute a long straddle and how the overall strategy performed. The market is currently trading at 7579, making the strike price of 7600 “At the money” as of the time of this writing. We would have to buy the ATM call and put options simultaneously if we wanted to long straddle. 

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Based on the scenarios discussed above, we can draw a few conclusions:

Technically speaking, this is a ladder and not a spread. The first two option legs, however, produce a traditional “spread” in which we sell ITM and buy ATM. It is possible to interpret the spread as the difference between ITM and ITM options. It would be 200 in this instance (7800 – 7600).
Net Credit equals Premium collected from ITM CE minus Premium paid to ATM and OTM CE
Spread (difference between the ITM and ITM options) – Net Credit equals the maximum loss.
When ATM and OTM Strike, Max Loss occurs.
When the market declines, the reward equals Net Credit.
Lower Strike plus Net Credit equals Lower break-even.
Upper Breakeven is equal to the sum of the long strike, short strike, and net premium.

Take note of how the strategy loses money between 7660 and 8040 but ends up profiting greatly if the market rises above 8040. You still make a modest profit even if the market declines. However, if the market does not move at all, you will suffer greatly. Because of the Bear Call Ladder’s characteristics, I advise you to use it only when you are positive that the market will move in some way, regardless of the direction.

In my opinion, when the quarterly results are due, it is best to use stocks (rather than an index) to implement this strategy.

10.3 – Effect of Greeks

Volatility does play a significant role when using the straddle. If I said that volatility makes or breaks the straddle, I wouldn’t be exaggerating. Therefore, the success of the straddle depends on a fair assessment of volatility. View the graph below for more information.

The cost of the strategy is shown on the y-axis, which is just the sum of the option premiums, and volatility is shown on the x-axis. With 30, 15, and 5 days until expiration, the blue, green, and red lines show, respectively, how the premium rises as volatility rises. As you can see, this is a linear graph, and regardless of the time until expiration, the cost of the strategy rises as volatility does. In a similar vein, strategy costs drop as volatility does.

Look at the blue line; it indicates that setting up a long straddle will cost you 160 when volatility is 15%. Keep in mind that the price of a long straddle is equal to the total premium needed to purchase both call and put options. When volatility is 15%, setting up a long straddle costs Rs. 160; however, assuming all other factors remain the same, when volatility is 30%, setting up the same long straddle costs Rs. 340. So long as – you are likely to double your investment in the straddle.

  1. You set up the long straddle at the start of the month

  2. The volatility at the time of setting up the long straddle is relatively low

  3. After you set up the long straddle, the volatility doubles

Similar observations can be drawn from the green and red lines, which show the price to volatility behavior at 15 and 5 days from expiration, respectively. This also means that if you execute the straddle when volatility is high and declines after you execute the long straddle, you will lose money. This is a very important thing to keep in mind. Let’s now quickly talk about the delta of the overall strategy. Since we are long on the ATM strike, both options’ deltas are close to 0.5.

  • The call option has a delta of + 0.5

  • The put option has a delta of – 0.5

The delta of the call option cancels out the delta of the put option, leaving a net delta of zero. Remember that delta displays the bias in the position’s direction. A bullish bias is indicated by a +ve delta, whereas a bearish bias is indicated by a -ve delta. Given this, a 0 delta means that there is absolutely no bias toward the market’s direction. Therefore, all strategies with zero deltas are referred to as “Delta Neutral,” and Delta Neutral strategies are protected from the direction of the market.

10.4 – What can go wrong with the straddle?

On the surface, a long straddle appears fantastic. Consider the fact that you stand to gain financially regardless of how the market performs. All you require is an accurate estimation of volatility. So what could possibly go wrong with a straddle? Well, two things stand in the way of your ability to profit from a long straddle.

Theta Decay – In the absence of other factors, options are depreciating assets, which is especially detrimental to long positions. The time value of the option decreases as expiration draws nearer. Holding onto out-of-the-money or in-the-money options into the final week before expiration will result in rapid premium loss because time decay accelerates exponentially during this period.

Remember that the break-even points in the earlier example we discussed were 165 points away from the ATM strike. Taking into account the ATM strike at 7600, the lower breakeven point was 7435 and the upper breakeven point was 7765. To achieve breakeven, the market must move 2.2 percent (either way) in percentage terms. This means that for you to start profiting from the time you start the straddle, the market or the stock must move at least 2.2 percent in either direction. and this transfer must be completed in no more than 30 days. Furthermore, a move of 1 percent over and above 2.2 percent on the index is required if you want to make a profit of at least 1 percent on this trade. A significant change in the index

We can sum up what really needs to go in your favor for the straddle to be profitable by keeping the previous two points plus the effect on volatility in perspective.

When applying the strategy, the volatility ought to be quite low.

During the strategy’s holding period, the volatility should rise.

The market should move significantly; it makes no difference in which way it moves.

The anticipated large move is time-bound and ought to occur quickly – well before the expiration

My trading long straddles have taught me that they are profitable when placed around significant market events, and the impact of such events should be greater than what the market anticipates. Please read the following paragraphs carefully as I will go into more detail about the “event and expectation” part. Consider the Infosys outcomes as an illustration.

Event – Quarterly results of Infosys

Expectation – ‘Muted to flat’ revenue guideline for the coming few quarters.

Actual Results: Infosys announced a “muted to flat” revenue guideline for the upcoming quarters, as was predicted. A long straddle would probably collapse if it were set up against the backdrop of such an event (and its expectation), and eventually, the expectation would be met. This is due to the fact that volatility tends to rise around significant events, which tends to raise premiums.

In other words, if you buy ATM calls and put options close to an event, you are essentially buying options at a time of high volatility. When events are made public and the result is known, the volatility and consequently the premiums fall like a stone. Due to the “bought at high volatility and sold at low volatility” phenomenon, this naturally breaks the straddle down, causing the trader to lose money. I frequently see this happening, and regrettably, I’ve seen plenty of traders lose money precisely because of it.

Favorable Outcome – Now imagine that they announce an “aggressive” guideline in place of the “muted to flat” guideline. This would essentially catch the market off guard and raise premiums significantly, making for a successful straddle trade. This indicates that there is a different perspective to consider: you should evaluate the outcome of the event a little more favorably than the market as a whole.

A straddle cannot be set up with a subpar evaluation of the events and their result. This may seem like a challenging proposition, but trust me when I say that a few good years of trading experience will actually enable you to assess situations far more accurately than the market as a whole. In order to be clear, I’d like to reiterate all the angles that must line up for the straddle to be profitable:

  1. The volatility should be relatively low at the time of strategy execution

  2. The volatility should increase during the holding period of the strategy

  3. The market should make a large move – the direction of the move does not matter

  4. The expected large move is time-bound and should happen quickly – well within the expiry

  5. Long straddles are to be set around major events, and the outcome of these events is to be drastically different from the general market expectation.

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